Fresh fears hit markets as crisis engulfs banks

New York: Citigroup faced mounting doubts about whether it can recover from heavy losses and Bank of America was facing a second dose of emergency government aid as the financial crisis roared back into global markets.

US and European equities slid to six-week lows, with shares in once-mighty Citigroup tumbling 23%, amid fears banks will need even more public funds to save them from collapse.

“You’d think the news on banks is baked in, but there’s still a lot of headwinds,” said Rich Parker, head of trading at Stanford Group in New York.

The crisis finally caught up with Canada too, where Nortel Networks Corp, North America’s biggest telephone equipment maker, filed for bankruptcy, hoping to save a once high-flying business whose long decline accelerated with the crisis.

More bad news was expected from Citigroup on Friday, when it plans to report quarterly results, six days ahead of schedule, and analysts are looking for a fifth straight multibillion-dollar loss. The bank was also widely expected Friday to provide details of a comprehensive downsizing designed to ensure its survival.

The US Treasury Department has pumped $45 billion of taxpayer funds from the Troubled Asset Relief Program (TARP) into Citigroup, including $20 billion on 23 November, when the government agreed to a bailout, sharing in bank losses in exchange for preferred stock and warrants.

The bailout helped avoid a collapse on the heels of the Lehman Brothers Holdings Inc’s bankruptcy on 15 September.

“I really don’t know how the unravelling finishes,” said Henry Asher, president of Northstar Group Inc in New York. “It looks like the government is forcing a controlled descent, without going the full monty as it did with Lehman.”

A person familiar with the matter said the US government was close to providing billions of dollars of additional support to Bank of America Corp, making the bank the second to require a second round of emergency government assistance.

Bank of America is struggling to absorb Merrill Lynch & Co, which it bought on 1 January. Merrill Lynch suffered significant losses in the fourth quarter. Bank of America and Merrill received $25 billion in October under the TARP scheme.

Bank woes, grim data

European banks also showed signs of fresh stress.

Deutsche Bank posted a surprise fourth-quarter loss of more than $6 billion, while analysts at Morgan Stanley forecast HSBC, Europe’s biggest bank, may need to raise up to $30 billion in a stock offering.

The German government was set to take a stake in Hypo Real Estate, sources with knowledge of the matter told Reuters. The move would mark the second partial nationalization of a German bank this year.

The grim corporate news came as data showed US consumers retrenched more than expected in December, while slumping industrial and economic output signalled more pain in Europe.

Sales at US retailers last month slumped 2.7 percent from November as a deteriorating economy made consumers slash spending during the key holiday period. Compared with a year earlier, sales plunged a record 9.8% in December.

The data again suggested the year-long US recession was deepening and could be the longest since 1981. New data also showed that the slowdown, far from running its full course, was spreading rapidly in Europe and elsewhere.

In another sign of the grim economic outlook, US business inventories fell 0.7% in November, the biggest decline in seven years.

The German economy, meanwhile, contracted sharply in last year’s final quarter and euro zone industrial output plunged in November, boosting expectations the European Central Bank will make a deep cut to interest rates on Thursday.